Limiting liability in commercial contracts: a quick guide for business owners

Including suitable limitation of liability clauses in your company's terms of business is crucial. However, it's not possible to limit your liability in any way you wish under a contract. 

A body of law has developed over the years that sets out how you can and can't limit your liability. As such, it's essential to carefully draft your limitation of liability clauses, taking all applicable laws into account, to ensure their effectiveness.

Why are limitation of liability clauses necessary?

Every commercial transaction carries an inherent level of risk, and liability clauses are crucial when protecting yourself and your business. 

In the UK, damages are not necessarily tied to the value of a contract, which means that your exposure and potential damages can be unlimited without a proper limitation clause. 

It's important to remember that consequential loss often far exceeds what you may have initially considered when signing a contract. Even if a contract appears to be of relatively small value, you should never assume that the corresponding liability will be equally minor. 

The type of limitation will depend on whether it is a business-to-consumer or a business-to-business contract.

Business-to-business contracts

In business-to-business contracts, for a limitation of liability clause to be effective, it must be incorporated into the contract, be clear and unambiguous, and cover the liability in question. 

Business-to-business contract liability in the UK is governed by a set of laws, the most important of which are the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015. These laws provide guidelines for the parties involved in commercial agreements to manage risk and liability.

Under the Unfair Contract Terms Act, a clause in a business-to-business contract that attempts to limit liability for death or personal injury caused by negligence is considered void. Additionally, any exclusion or limitation of liability must meet a reasonableness test, which considers various factors, such as the bargaining power of each party and the nature of the contract.

Moreover, the Unfair Contract Terms Act includes implied terms that relate to the quality of the goods or services provided, their fitness for purpose, and their conformity with the contract's description or sample.

It's important to note that Unfair Contract Terms Act only applies to business-to-business contracts within the UK and does not cover international contracts. 

Business-to-consumer contracts

Consumer legislation makes it challenging for businesses wanting to limit their liability to consumers. These laws include the Consumer Rights Act 2015 and the Consumer Protection from Unfair Trading Regulations 2008.

Under these laws, certain types of limitation of liability clauses are prohibited and are referred to as "blacklisted" clauses. These include attempts to exclude or limit liability for death or personal injury caused by negligence, fraud, or misrepresentation.

In addition, any limitation of liability clauses in business-to-consumer contracts must be fair, clear, and presented in plain language that the consumer can easily understand. Any clauses that create a significant imbalance between the parties to the consumer's detriment will be deemed invalid.

This means that businesses must be very careful when drafting limitation of liability clauses in business-to-consumer contracts. They need to ensure that their clauses are transparent, do not contain any unfair terms, and do not disadvantage consumers. Any clauses that do not meet these requirements will not be enforceable, and the business could face legal consequences.

Contact our corporate solicitors

When it comes to understanding limitation of liability clauses in commercial contracts, our team is on hand to help.

Our commercial contract solicitors have extensive knowledge and expertise in contractual matters and can guide you through complex language. We can review the contract and explain the limitation of liability clauses to you in detail, highlighting any potential risks or issues that may arise. 

Additionally, we can help you negotiate the terms of the clause with the other party to ensure a fair and reasonable outcome for both sides. It's always better to be proactive and address potential issues before they become problematic.

We have solicitors in London, Brighton, Eastbourne, Hastings, Uckfield, and Ulverston, and we work with clients locally and nationally.